Crude oil by rail or pipeline? New studies explore the question

Repost from Midwest Energy News [Editor: You may be tempted to quit reading at “But if one assumes oil will be extracted and refined for the foreseeable future…” But the article gets really interesting after that. Keep going!… – RS]

Crude oil by rail or pipeline? New studies explore the question

Recent years have seen massive standoffs over oil pipeline construction and smaller but persistent protests against the transport of oil by train, or what opponents call “bomb trains.”

Protesters often highlight the catastrophic risks if pipelines rupture near aquifers or sacred lands, or if trains derail in cities. And many argue that oil should not be extracted at all, especially through fracking tight shale deposits or mining viscous tar sands.

But if one assumes oil will be extracted and refined for the foreseeable future, two new studies offer insight into the economics, health impacts and risks of pipelines versus crude oil by rail, or CBR.

Transporting oil by rail is often viewed as a stopgap measure until more pipelines are built. But in a paper published this month, public policy professor Ryan Kellogg and business professor Thomas Covert at the Energy Policy Institute at the University of Chicago found that CBR actually plays a crucial role in the oil economy, similar to the role that peaker plants play in our country’s electric system.

That is, CBR is a flexible way to get oil to and from different locations on relatively short notice, responding to market demands.

Pipelines are regulated by the federal government in a way similar to utilities in regulated states, Kellogg notes, meaning that the government oversees their pricing structure and they cannot earn more than a certain rate of return. Oil shippers also enter into long-term contracts with pipeline companies, meaning they have to speculate about future oil prices and demand.

Shipping oil by rail can be more financially attractive for everyone involved since it does not require long-term contracts, there is no regulated rate of return for railroad companies and rail offers more options for where oil is picked up and delivered.

“Putting aside the environmental issues, pipeline and rail work well when paired together,” Kellogg said. “Think of pipelines — once you have the upfront investment done, they are a very low-cost, very reliable way of moving oil from point A to point B. What rail is very good at is responding to conditions as the oil market changes. When the oil market says, ‘Hey there’s a bunch of oil coming out of location C,’ rail is relatively easy to ramp up and get going, or ramp down if there’s a market downturn.”

Hidden health impacts

But shipping oil by rail has serious public health impacts, according to a study by Karen Clay, professor of economics and public policy at Carnegie Mellon University. And she’s not talking about the risk of derailments.

In a paper released this month, Clay quantified the air pollution and greenhouse gas cost of diesel emissions from oil trains going from North Dakota in 2014, when production was high and about half of Bakken oil was shipped by rail. She found that the air emission costs of CBR were twice the cost of oil train accidents. While accidents like the Lac Megantic tragedy generate massive attention and fear, they are relatively rare, whereas the emissions from oil trains impact scores of people who live in urban areas like Chicago and Clay’s home, Pittsburgh.

“The relative magnitudes are really different,” Clay said. “Certainly if a crude oil train blew up in Chicago, it could do billions worth of damage. Air pollution happens every day, it seems kind of invisible, people think it’s not that important, but it is important. It’s about the difference between actual risk and perception of risk — humans are very bad at assessing risk.”

Clay found that the environmental and health costs of transporting oil by rail are double the cost by pipeline. And the air pollution and greenhouse gas emissions driven by pipelines also have a greater cost than pipeline spills and accidents — eight times greater.

She quantified the emissions from power plants needed to power the pumping stations along pipelines, calculating the health and other costs based on the fact that these power plants are typically located in sparsely populated areas, as opposed to the trains which pass through dense urban areas often including minority and low-income communities with environmental justice issues.

Economic levers

Kellogg wrote that the Dakota Access Pipeline would have likely been built to carry 29,000 to 74,000 more barrels of oil a day beyond its capacity of about 450,000, if CBR had not been available. In a pipeline with a fixed diameter, more oil can be shipped by adding more pumping stations along the route, or by “twinning” — adding parallel pipelines within the same right-of-way.

Since pipelines deliver oil through long-term contracts, and the Federal Energy Regulatory Commission (FERC) caps the maximum rate a pipeline can charge, a pipeline can’t raise its rates when demand for its service is high.

“A pipeline can get congested during peak times so you can’t get any more oil through it, but the rate still can’t increase above that maximum regulated rate,” said Kellogg. “So the fact that pipelines can become congested creates the opening for rail to come in and help move the extra oil.”

Both Clay and Kellogg said that if the true cost of oil-by-rail was calculated into the fees that oil shippers are charged, the economics of oil transport might change. Kellogg’s paper predicted that baking the cost of railroad air emissions into shipping prices would raise CBR costs by $2 a barrel.

If shipping by rail got more expensive, there might be more demand for pipelines, and also alternate ways of moving oil. For example, shipping it by rail or pipeline to the Gulf of Mexico then by ship to the U.S.’s East Coast, rather than by rail cutting through the heartland.

Railroads are currently required to install cleaner diesel engines on new locomotives. Meanwhile, advocates have called for replacing older locomotives more rapidly and using electric locomotives in populated areas. Kellogg noted that railroad safety measures in the wake of Lac Megantic could also raise CBR shipping prices, and might shift more business to pipelines.

The future of crude-by-rail

Kellogg’s paper notes that between 2010 and 2014, oil shipments by rail grew from virtually nothing to 750,000 barrels a day, representing a tenth of total domestic oil production. This was largely because of spiking production in the Bakken shale.

Oil shipments by both pipeline and train have declined precipitously since oil prices starting dropping in 2014. But Clay said people should not stop thinking about the risks and economics of CBR even though they aren’t seeing as many oil trains. If oil prices rise and production ramps up, oil trains could proliferate once again.

Given that pipelines result in far fewer public health impacts than rail, Clay also advocates the possibility of shipping other petroleum-related compounds like butane, propane and ethanol by pipeline, rather than train.

“It’s just trying to get people engaged with the idea that this other stuff also has air pollution risk and accident risk,” Clay said. “Maybe the spill and accident risks are lower, but the air pollution risks are the same on a per ton basis over similar routes. This is a broader issue about anything that could be shipped by pipeline instead of rail.”